FX embedded derivatives in executory contracts
Posted: 26 Aug 2021, 17:30
Hello everyone,
Was wondering if you have experience with executory contracts that include FX clauses.
Take for example a master sales agreement where the price of an equipment normally priced in a foreign currency is agreed to be sold at a certain FX rate (according to market rates at the time the master agreement is signed). But the contract also states that if the spot rate at the time the contract is settled is below the agreed spot rate, then the pricing will be according to the spot rate at settlement. When the contract is exectuted, the forward rate will likely be different from the rate agreed in the master agreement.
Question is: if the rate is below the agreed rate, will you recognise revenue according to the forward rate prevailing at the date the contract is executed (and subsequently account for fair value changes on the embedded FX derivative till settlement) or according to the master agreement's rate and book a day-1 loss for an off-market derivative?
Note: the question is not about whether or not the derivative needs to be bifurcated. Given the existence of optionalities, it must be bifurcated.
Thanks a lot in advance!
Was wondering if you have experience with executory contracts that include FX clauses.
Take for example a master sales agreement where the price of an equipment normally priced in a foreign currency is agreed to be sold at a certain FX rate (according to market rates at the time the master agreement is signed). But the contract also states that if the spot rate at the time the contract is settled is below the agreed spot rate, then the pricing will be according to the spot rate at settlement. When the contract is exectuted, the forward rate will likely be different from the rate agreed in the master agreement.
Question is: if the rate is below the agreed rate, will you recognise revenue according to the forward rate prevailing at the date the contract is executed (and subsequently account for fair value changes on the embedded FX derivative till settlement) or according to the master agreement's rate and book a day-1 loss for an off-market derivative?
Note: the question is not about whether or not the derivative needs to be bifurcated. Given the existence of optionalities, it must be bifurcated.
Thanks a lot in advance!